Will Blockchains Reshape Corporate Entities?

Corporate entities have
long been employed by enterprises seeking to limit their liability, protect
their assets and minimize tax burdens. These legal structures have evolved over
time, emerging as one of the most common vehicles for conducting business
domestically and worldwide.

Today, with the rise of
blockchain technology, the future of corporate entity formation appears to be
poised for disruption. Most notably, instead of
these businesses being formed by government statutes, ecosystems of individuals
would work, collaborate and generate revenues via decentralized autonomous
organizations (known as the DAO). As a result, centrally governed organizations
that have traditionally been used could lose their appeal.

Adding fuel to this
movement is a company known as Otonomos,
touted as the world's first blockchain-chartered company. It provides business
owners with a mechanism for forming offshore corporations in places like
Singapore, Hong Kong, the U.K. and the Cayman Islands — entities that allow
these businesses to hold shares in the same way that one would own bitcoins in
a digital wallet. Moreover, through Otonomos, businesses can transfer equity
peer-to-peer to attract co-founders, pay collaborators, generate new private
investors and garner crowdfunding.

Then there is BitGo, the digital bitcoin wallet that has built a
major following of users that find appeal in its security features. It is
currently branding a feature that assists businesses with integrating digital
currencies into their existing financial systems securely and at scale.

In an
exclusive interview with The Distributed Ledger, Steven J. Ehrlich, associate at the
New York–based Spitzberg Partners LLC, weighed in on the transformative changes taking
place in the corporate entity space amid blockchain’s emergence. His
comments come as Spitzberg was assisting with a project called Global Delaware, the international business development arm for the State of
Delaware. The goal of the project is to assist new business startups and established
companies form Delaware-based business entities that benefit from the state’s
tax favorability, asset protection and a friendly regulatory climate.

How
could the blockchain and the DAO disrupt the traditional world of corporate
entities such as LLCs and corporations?

That
depends on how you define the word “disrupt.” Right now, the most applicable
use cases for blockchain technology in the world of corporate governance are
tied to records management, accounting and the sale and issuance of securities
for traditional corporations. None of these areas are strangers to fraud and
inefficiencies and if through the use of a blockchains these processes can be
streamlined and made increasingly secure, employees, board members, investors
and any other concerned party will be able to have a much more accurate and up-to-date picture of a company’s financial health at any given point in time.
However, I do not necessarily think that this will qualify as a
“disruption.”

How
do you believe that disruption might occur?

I
think we get closer to the term “disruption” once we start thinking about ways
that blockchains can impact the proxy voting system commonly used by
corporations. The system remains highly opaque, with many people not even
aware of their voting rights. Putting proxy voting onto a blockchain can
broaden and distribute the voting base for a particular corporation. This can
have the effect of creating an engaged shareholder base that is more
incentivized to not only hold corporate leadership accountable, but can also
serve as a valuable resource to drive business development initiatives.

Could
this new approach to proxy voting also lead to discussions surrounding the DAO or
DAOs in general?

Absolutely.
Because this setup dictates a decentralized governance structure, token holders
must have rights that go far beyond what proxy voters have today. Should
we find ourselves in a situation where this scenario plays out, it would
represent a fundamental shift in basic tenets of corporate governance today.

How
do you believe this intersection between blockchains and corporate entities
might change the landscape in terms of offshore and international businesses?

As
viable use cases develop and the blockchain becomes more mature, there is
definitely the possibility for the technology to become more of a standard. If
this happens, it could cause people to look askance at companies seeking to
offshore, wondering if there is something besides the favorable regulatory
climate that is appealing to them. However, I think at this point it is pretty
far off and this should not be the central goal of developers in the space.
Additionally, there are already many different forms of blockchains with
multiple levels of privacy and accessibility. I would imagine that
jurisdictions that place an emphasis on discretion would pick a solution built
with that in mind.

Do
you believe that we'll see U.S. states such as Delaware, Nevada and Wyoming, which
are known for their legal protections, embrace blockchains for corporate
entities?

I
expect them to embrace the technology to the extent that they see it as central
to their competitiveness as a destination for incorporation. Delaware in
particular expects to amend its state business entity laws by the end of the
summer to allow for the issuance and maintenance of smart securities on their
proprietary blockchain. This would be a significant step forward that is
unmatched anywhere in the world. Additionally, earlier this year, senators
in Wyoming unanimously backed a proposal that will ban local authorities from
taxing blockchain use. It will also allow for smart contracts and blockchain
signatures to become acceptable records under state laws, which are necessary
precursors for more robust implementations.

What
is your view of a company like Otonomos that promotes blockchain-centric entities?

Companies
like Otonomos are entering the space at a very interesting time and they have
the advantage of building out one universal platform that incorporates features
like virtual boardrooms, shareholder wallets, cap tables, key documentation,
etc. on one platform. This could be a very interesting proposition for new
startups, especially companies that are seeking funding via the initial coin
offering (ICO) route. However, I think they will face challenges trying to get
established firms, especially large ones, to transfer onto their platforms given
the stakes.

How
do you see this emerging corporate entity space eventually playing out,
especially in terms of regulators?

DAOs
will need to pay taxes just like other corporations, as they’ll still rely
on government services. Similar to Apple, which relies on the U.S. Navy to
keep the seas free for them to ship their products around the world,
decentralized entities will rely on roads, bridges, law enforcement, etc. to
conduct their business.

But
how would this actually work?

Without
getting into the intricacies of corporate tax law, whatever the codes may be
within a certain jurisdiction, my expectation would be for them to be
programmed into the corporate code via smart contracts that are automatically
executed. There would also have to be appropriate viewing permissions
built into the DAO so that the regulator or tax collector would be able to
verify that the smart contracts are programmed and executing properly without
revealing corporate secrets.

In
closing, what sort of emerging trends do you believe we'll see in the next 12
to 18 months relative to the blockchain and corporate structures?

Over
the next 12 to 18 months I expect to see a primary focus to be on proxy voting,
supplemented by progress pertaining to the maintenance of corporate records, regulatory
compliance and the selling of corporate shares. Hopefully, we will see adoption
begin to emerge on the corporate side, supplemented by increased demand for the
shares of companies that are issued on a blockchain, or for a company that
utilizes blockchain technology to make its decision-making and accounting more
transparent.

Regarding
DAOs, I am anxious to see how companies that raise money via ICOs govern
themselves as they build their products and go to market. An important way
to try and avoid the regulatory glare of the SEC is to make tokens consumptive
and give them utility. This may end up being a middle ground between
today’s current system and a utopia filled with truly decentralized
organizations, but it is a necessary and worthwhile step.